The announcement this week that Ericsson would merge its Mobile Platforms division into the ST-NXP Wireless business sent shock waves around the industry.
The first words on everyone’s lips - especially those of US financial analysts - were: "What does this mean for Texas Instruments?" which of late has suffered blow after blow. It lost its dominance over the supplying of Nokia handsets almost exactly a year ago and its global wireless chip lead to rival Qualcomm. It has also had various misfortunes and misfirings in the remainder of its business – pulling back out of introducing its version of UltraWideBand into handsets and becoming virtually invisible in the mobile TV chip market. Now it appears to have lost something that on the horizon was quite promising.
It is not essential to have the chips in base stations made by the same company that makes the chips in devices, but at the beginning of any handshake cycle it is advantageous. So as LTE looms on the horizon it was key that Texas was working with Ericsson’s Mobile Platforms division on handset reference platforms – initially for HSPA and then we presumed later for LTE. This again was a deal signed about a year ago.
It is hard to see now just how that partnership can continue when a company which has just stolen a large, key, profitable chunk of its Nokia business, focused on UMTS 3G, is the company that appears to be about to hold the hand of Ericsson’s mobile platform business.
The reference platform idea was a way for Ericsson to get something back for its huge R&D spend in handsets, and a way of giving that other famous joint venture Sony-Ericsson something of a head start in these broadband wireless technologies, and for TI it gave the inside track to the thinking within the world’s biggest base station builder.
On the back of the STMicro deal with Ericsson which merges with the recently formed ST-NXP Wireless, creating a 50 / 50 joint venture, that deal cannot remain in place. Neither can any semblance of a lead for TI in the mobile chip market, as this new combination already has deals at Nokia, Samsung, Sony Ericsson, LG and Sharp and we think it will keep many of them.
The new fabless joint venture will employ almost 8,000 people with pro forma 2007 sales of $3.6bn - not a Texas in its own right, but perhaps getting close to rivalling the handset side of the Texas business.
Only the antipathy with which Nokia holds Ericsson may stop this new joint venture taking more business from Nokia. The Espoo, Finland giant still has to decide if the merging of the Infineon wireless efforts, which it had trusted as the main supplier for GSM components, with the supplier in ST that it trust its 3G chip to, makes it worth looking around for another chip supplier. Nokia said it wanted four main chip suppliers, and now it already has only three, and one of them is making out with the Ericsson that it so mistrusts.
The stage is set for one of three things to happen. Nokia will use this as the trigger it needs to invite Qualcomm into its supply chain. Or it will revert to type and go back to a chastened Texas Instruments, and offer it a chance to redeem itself - or it might amplify the role that it laid out for Broadcom in its initial contract for mere Edge processors last August. If we had to bet, this will mean a shift of some business away from the ST-Ericsson Wireless operation back to Texas, just in time to save the US chip company’s share price. However Nokia has its hands on just 40 per cent of the handset industry and the negative affect globally on TI is likely to be significant as there is one more player in town with the scale and know how to take its place.
From the Ericsson point of view it will mean that Carl-Henric Svanberg, Ericsson CEO - although he will notionally be chairing this new joint venture - will be able to concentrate on his core business of building next-generation base station technology and getting his company’s finances back on top after the last poor quarter saw much of the Swedish giant’s profits evaporate.
Ericsson will contribute $1.1bn to the joint venture, with around $700m of that going to ST so that it can buy out the remaining 20 per cent it doesn’t own of the NXP Wireless business.
Copyright © 2008, Faultline
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